Private Equity Exits
1. What is a private equity ‘exit’?
A private equity exit is the way in which private equity funds ultimately return money to their investors from their underlying investments. They typically take the form of share sales, asset sales, initial public offerings (IPOs) and winding-ups which result in proceeds being released by the private equity fund, which are then distributed to its investors.
2. Are they important for private equity?
Yes - they are the lifeblood of the private equity industry. Without (successful) exits, a private equity house cannot raise funds to make investments in the first place; so every time that a private equity fund makes an investment, it will be thinking about the prospects of an exit in the future.
3. What are the key issues to think about when advising on an exit?
That is clearly a very broad question and much will depend upon whom you are advising and the specific form of exit involved. However, the key issues for private equity houses when proceeding with an exit are what, if any, contingent liabilities will arise out of the exit and how these will impact on the ability to make, and the timing of making, distributions to their ultimate investors.
4. Is this a good or bad time for private equity exits?
It has been a very good time for a combination of reasons, linked to the appetites of certain private equity firms to spend money from their funds, thus increasing the number of ‘secondary’ buy-outs; the strength of trade buyers' balance sheets, giving them access to significant cash resources to make acquisitions; the (until recently) active debt markets, giving buyers access to significant amounts of debt to make acquisitions; and a general feeling among certain investors that this is a good time in the economic cycle to acquire businesses. Time will tell how exits favour over the coming months, with nervousness around the economic outlook and difficulties in the financial markets. However, overall in the medium term, I would not expect the pace of exit activity to decline materially.
5. What trends should we be looking for in the coming years?
I think we will see more IPOs structured similarly to those in the United States, where private equity investors list a company's shares and then sell a very limited amount of their stock, but use the platform of the listing to grow the business before making a realisation on their investment. We may also see private equity houses combine with each other or with trade buyers to give themselves a competitive advantage when making acquisitions, which will then subsequently have an impact on exits - particularly if the ‘exit aspirations’ of the two investors differ, thus causing tension over the timing and manner of any exit.